Daridra Narayan in a three-piece suit

Daridra Narayan in a three-piece suit. That sums up the “reforms-with-a-human face” budget presented by Finance Minister Chidambaram on Thursday.

This is no dream budget, just an effort to flesh out the Common Minimum Programme. Its only dream is to ensure a full Parliamentary term for a quarrelsome coalition.

Despite rhetoric about radical change, the budget is substantially about continuity in policy, and many investors will feel reassured by that.

The increase in the FDI limit of insurance to 49% represents unanticipated liberalisation. Save for the education cess, taxes have not been raised, and 1.4 crore middle-class people have escaped the income tax net.

The additional Rs 10,000 crore allotted to “human face” schemes is a mere 0.33% of GDP.

Mr Chidambaram says the absorptive capacity of state governments for a larger sum does not exist in the remaining part of the year. Which shows that reform is not going to be destroyed by welfare or social spending.

Despite his hope of pleasing the stock market by abolishing long-term capital gains tax and reducing short term gains tax to 10%, the markets crashed because of the new 0.15% tax on the turnover of stock market transactions.

In effect, Mr Chidambaram has become India’s biggest stockbroker, converting all existing brokers into sub-brokers who pay him a 0.15% commission on transactions. Many traders complain that day trading and derivative trading will shrink dramatically because of the tax, so the expected tax revenue will also be far less than the Rs 7,000 crore the budget hopes to get.

Mr Chidambaram’s defence is that market operators themselves suggested the turnover tax to him when he went to Mumbai. Has he been caught in a bear trap?

Optimistic budget assumptions project a sharp fall in the revenue deficit to 2.5% of GDP from 3.6% last year. The fiscal deficit is projected to decline only marginally, to 4.4% from 4.6 %, so foreign investors may not be too impressed. And they will be suspicious of Budget projections that assume a whopping 25% increase in gross tax revenue, more than double the projected 12% growth in nominal GDP.

Corporate tax is projected to rise by over 40%. This smacks of wishful thinking. If, however, the revenue target is met, it will represent a welcome effort in deficit reduction. Another major source of big money for the budget is foreign aid.

Last year, there was a net outflow of Rs 11,705 crore because of pre-payment of high-interest foreign loans.This year, Mr Chidambaram has assumed a net inflow of Rs 8,077 crore, of which a lot is for the Sarva Shiksha Abhiyan.

This is double the Rs 4,000-odd crore he aims to get from the education cess of 2%. The education cess, extension of service tax and foreign aid have made possible an increase of Rs 24,000 crore in Plan spending, of which Rs 10,000 crore is Mr Chidambaram’s announced increase over the interim budget.

The Planning Commission will allocate this additional sum to CMP aims like anti-poverty schemes, agriculture, education, health and employment. This is a far cry from the Rs 200,00 crore which some economists have calculated will be needed to implement the CMP in full.

The Left front may be unhappy at this, but many investors will breathe a sigh of relief. Mr Chidambaram has shown some courage in proposing a pilot project in some districts to distribute food stamps to the poor in place of the dysfunctional public distribution system for foodgrains.

But his proposal was greeted with jeers in the Lok Sabha, and strong vested interests within the ruling coalition will oppose the experiment. Yet, if several states agree to participate in the experiment, it could be the start of a bold new initiative to improve service delivery to the poor.

Mr Chidambaram must be disappointed that the markets have not cheered reforms like reducing short-term capital gains tax to 10%, increasing the foreign investment limit in insurance companies to 49%, widening the service tax net rather than taxing industry or imports, de-reserving 85 items on the small-scale industry list, and increasing spending (and tax breaks) for agro-processing.

Tractors and dairy equipment have been exempted from excise duty, and that will cheer manufacturers. The shipping industry will cheer the new tonnage tax, which should halve its tax burden.

The textile industry, however, is not convinced that it will escape unfair competition from handlooms and powerlooms now that the latter have been exempted from Cenvat. The service tax has been raised from 8% to 10% but with Cenvat credit, so that it is revenue neutral. It has also been extended to another 13 services.

Senior citizens will be happy to receive a 9% return on special bonds. Other interest rates for small savings have not been touched despite the downward drift in market rates. So, this special subsidy to middle class savers continues. This just shows that no matter which party comes to power, it cannot ignore the middle class.